The prospect of central banks issuing digital currency (CBDC) immediately raises the question of how this new form of money should co-exist and interact with existing forms of money. This paper evaluates three different scenarios for the implementation of CBDC in terms of their monetary policy implications. In the ‘money user scenario’ CBDC co-exists with both cash and commercial bank deposits. In the ‘money manager scenario’ cash is abolished and CBDC co-exists only with commercial bank deposits. And in the ‘money maker scenario’ commercial bank deposits are abolished and CBDC co-exist only with cash. The evaluation is based on an adaption of the classical international monetary policy trilemma to a domestic monetary system with multiple forms of money. Our proposition is that a monetary system with two competing money creators, the central bank and the commercial banking sector, can simultaneously only pursue two out of the following three policy objectives: Free convertibility between CBDC and bank money, parity between CBDC and bank money, and central bank monetary sovereignty, which is the use of monetary policy for anything else than support for commercial bank credit creation. This means that the decision on the design of a monetary system with CBDC implies a crucial political decision on the priorities of the central bank.

This paper is a review of Danmarks Nationalbank's recent analysis of the prospects
of implementing a Central Bank Digital Currency (CBDC) in Denmark.
We concur with Nationalbanken's conclusion that CBDC does not add efficiency
or further functionality to existing payment solutions. We argue, however, that
their analysis fails to take into account the potentials for increased financial stability
given the fact that CBDC carries no credit risk. We also find that Nationalbanken's
dismissal of CBDC on the grounds that it does not provide new
monetary policy tools, since interest rates are bound by the fixed exchange rate
regime, fails to consider the value of CBDC in the event of a future crisis. Finally,
we argue that the Nationalbanken's views may reflect a primary concern with
the preservation of the existing banking sector in its current form over and above
the needs of the general public.